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‘Unlimited’ still remains a drag

Key takeaways from Arvind Fashions’ (ARVINDFA) Q4FY21 result: 1) overall sales grew 14% YoY – in line with our estimates; 2) ‘power brands’ achieved sales growth of 17% YoY with ~7.5% pre-Ind-AS116 EBITDA margins; 3) specialty retail and emerging brands incurred pre-Ind-AS116 EBITDA loss of ~Rs180mn; 4) company passed an enabling resolution to raise up to Rs4bn though it has no immediate plan to implement it; and 5) net debt declined by >Rs3bn in FY21 to Rs9.2bn owing to equity infusion and working capital improvement.

Net debt is likely to remain at similar levels by Mar’22 as well. Factoring-in the impact of recent lockdowns, we reduce our FY22E EBITDA though we maintain it for FY23E. Maintain REDUCE with an unchanged DCF-based target price of Rs132/sh, as net debt to EBITDA is still likely to remain high at ~3.5x in FY23E amidst gradual demand recovery. Key risk: faster recovery in discretionary spends, and turnaround or sale of Unlimited.

* Revenues grew 14% YoY to Rs7.7bn with a marginally positive LTL ‘same store sales’ on account of recovery across channels, increased footfalls and continued traction in the online channel. Power, specialty retail and emerging brands registered sales growth of 17%, 10% and 1% YoY respectively. Gross margins declined 137bps YoY owing to mix change. Company witnessed slower recovery in the wholesale stores (reached 60% of pre-covid billing) while online sales grew ~4x YoY in Q4FY21. Online channel contributed >30% of the overall revenues in FY21. Q1FY22 has been sharply impacted due to resurgence in covid cases and management expects gradual opening of its store network over the next 1-2 months.

* Cost optimisation led to savings of Rs5.4bn (~40% of costs) in FY21 owing to lower rentals, supply chain efficiencies and manpower cost optimisation. Management stated that cost reduction of Rs1bn p.a. is structural in nature whereas the other costs will increase as business activities bounce back. Company has completed exit of loss-making brands (TCP, Hanes, Newport and Ruf & Tuf). GAP exit is expected to be completed in H1FY22, which would lead to release of remaining ~Rs750mn out of Rs1.5bn of expected release of capital employed from discontinued brands.

* Net debt reduced by >Rs3bn to Rs9.2bn in FY21 on the back of non-debt fund infusion of ~Rs7.6bn (two rights issues and Flying Machine’s minority stake sale to Flipkart). Gross and net working capital reduced by Rs5.2bn and Rs1bn respectively in FY21 due to lower inventory and receivables. Company incurred pre-Ind-AS116 EBITDA loss of Rs1.7bn, PBT loss of Rs1bn from discontinued operations, exceptional loss (for inventory dormancy, allowance for debtors, etc.) of Rs1.6bn, and interest costs of Rs1.5bn during FY21. Company is likely to receive Rs960mn of final call money of rights issue in Q1FY22.

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